On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act), which has been touted as the most significant financial services reform in the United States in the last 70 years. It’s not just U.S.-headquartered financial institutions that will be affected by the new law. Consistent with the U.S. principle of national treatment – foreign banking organizations (FBOs) operating in the United States have the same rights and are subject to the same restrictions as their domestic counterparts – a number of new provisions will also affect the foreign banking community.
Key among these provisions are:
- The application of capital rules to intermediate bank holding companies, in a departure from what is the current practice
- The designation of foreign-owned banks with assets of more than US$50 billion and possible designation of foreign-owned nonbank financial services companies as systemically significant, thus subjecting them to Federal Reserve oversight and more stringent prudential supervision, and requiring that they develop living wills
- Severely tightened restrictions, under the Volcker Rule, on the ability to conduct proprietary trading and sponsor or invest in hedge funds and private equity funds
Challenges and Opportunities
The so-called Collins Amendment requires federal bank regulators to establish minimum leverage and risk-based capital requirements no less stringent than those in place for insured depositories prior to passage of the Act for insured depository institutions, bank and thrift holding companies, and systemically significant nonbank financial services companies. Based on Federal Reserve SR 01-1, FBOs have been able to rely on the capital strength of their consolidated banking organizations, and intermediate U.S. bank holding companies have not been required to comply with U.S. capital adequacy guidelines. Under the Act, intermediate U.S. holding companies will have until July 2015 to meet U.S. capital adequacy guidelines.
There is one ray of hope for FBOs. Within 18 months of its passage into law, the Act requires the U.S. Government Accountability Office (GAO), in consultation with the U.S. Treasury Department and the federal banking agencies, to conduct a study of and issue a report on capital requirements for intermediate holding companies. It is possible, but by no means assured, that the GAO could recommend changes to intermediate holding company capital rules. In the meantime, however, FBOs will need to access and start planning for additional capital needs.
New prudential requirements notwithstanding, the impact of being designated systemically significant will differ for FBOs and foreign-owned nonbank financial firms since FBOs are already subject to oversight by the Federal Reserve and the vast majority of FBOs are currently subject to Federal Reserve examination. Nonbank financial firms are likely to find supervision by the Federal Reserve much different than the supervisory regimes they have experienced to date (as we pointed out in the 11/20/2008 edition of our Global Financial Crisis Bulletin, “‘Oil and Water’? Differences Between Investment Banking and Commercial Banking Supervision”).1 For both FBOs and nonbank financial firms, developing living wills to satisfy the Federal Reserve could prove very tricky because it is not at all clear how (or why) one would develop such a plan for part of a company.
The impact of the Volcker Rule on FBOs will depend in part on how the Federal Reserve and other agencies ultimately interpret exemptions in the law for activities conducted outside of the United States, but FBOs presumably may have more options available to them in this instance than their domestic competitors.
The above are but a few of the more significant implications for foreign-owned financial institutions. Along with domestic institutions, foreign firms will face increased fees and assessments, examinations of nonbank companies, changes in the legal lending limit, new governance requirements, and a rash of other new requirements.
Our Point of View
With so many studies to be undertaken and so many rules to be promulgated, the full impact of the Dodd-Frank Act on either domestic or foreign-owned financial institutions will not be known for some time. The industry will need to monitor developments closely and work with its trade associations and other representatives to help shape the final rules.
One lesson we did learn from the financial crisis, though, is to plan for all contingencies. Proactive foreign-owned firms will want to review all of the provisions of the Act and consider the potential increased costs and lost revenue associated with implementing new requirements, as well as the options for restructuring some of their activities outside of the United States.
How We Help Companies Succeed
Members of Protiviti’s Risk & Compliance Team assist companies in understanding the requirements of new regulations and the impact of these requirements on their business operations. We also help companies evaluate their options to minimize cost and regulatory burden and maximize revenue potential.
Protiviti was engaged by a diversified global financial services company to establish a program management office to evaluate, plan for, execute and report on reorganizations and divestitures of several significant business operations. We worked seamlessly with the client, its counsel, accountants and tax advisers to consider available options and ensure that the impact of the determined actions was clearly understood, that reorganizations and divestitures were appropriately managed to control risks, and that risk management and compliance programs were properly aligned with reconfigured business operations.